Labor’s love affair with the market: The Keating years

In the final instalment in our series on the history of the Australian Labor Party, Jean Parker explains how Keating was the architect of neo-liberalism in Australia, and alongside it, the crisis of the Party today

Big business loved Paul Keating. In 1995 researcher Leslie Sklair asked 96 business leaders who they believed had done the most to “push forward the globalising agenda of tariff reduction, international competitiveness and opening up [the economy] to the outside world”. They favoured Labor Prime Minister Paul Keating over the CEO of BHP by two to one.

The October issue of Solidarity discussed the Hawke Labor government’s attempts to stabilise Australian capitalism in the 1980s by removing barriers to profit-making. In particular, Labor’s Accord with the ACTU removed union opposition to Labor’s neo-liberal reform agenda and allowed the government to strip away hard-won rights and drive down living standards.

In this issue, we examine Keating’s deregulation of Australia’s financial sector in his role as Treasurer from 1983-1991, before looking at how as Prime Minister (1991-1996) he deregulated labour relations and the public sector, opening the way for the electoral revival of the Liberals.

The unifying trait in Keating’s time as Treasurer and Prime Minister was his zeal for market competition and driving it into every aspect of Australian life. Right-wing journalist Paul Kelly accurately described Keating as having “no political inhibitions about putting the blowtorch of the market to the organs of capitalism”. And with financial deregulation, privatisation and labour market reform, Keating certainly did wield the blowtorch of the market to restructure Australian capitalism, increase productivity and force workers to work more intensively.

Treasury years

In the first week after Labor formed government in March 1983, the head of his department told the new Treasurer Keating that the out-going Liberal Treasurer, John Howard, had hidden a $9.6bn “hole” in the government’s finances. Not only would this serve as parliamentary ammunition against the Liberals, it would be the excuse used to drop spending promises Labor had campaigned on.

Paul Keating was the architect of neo-liberalism in Australia - and the crisis of today's Labor Party

Within days Keating had permanently severed Labor’s connection to Keynesian economics, formed an alliance with Treasury bureaucrats, and begun the budget cutbacks that would characterise the “economic rationalism” of the new Labor government.

Labor had opposed financial deregulation before it took office, but once in power Keating removed financial regulations, including the ban on foreign financial institutions operating in Australia. Within eight months Hawke and Keating had “floated” the Australian dollar on the foreign exchange market, divesting the government’s power to control Australia’s currency.

Labor handed the government’s power to set interest rates to the Reserve Bank. They also implemented the recommendations of the Campbell report into financial deregulation that had been left in the “too hard” basket by the Fraser government.

These measures, now part of neo-liberal orthodoxy, imposed the judgements of banks and the financial markets on central aspects of the economy and removed any vestiges of government (and democratic) control. These measures also signalled that Labor had meekly surrendered any commitment to even the moderate social-democratic tradition of using parliament to gradually reform capitalism or curb the gross inequalities created by the drive for profit.

By deregulating the financial system and slashing tariffs, Hawke and Keating hoped the pressure of international competition would spur the modernisation of the Australian economy. Workers interests’ were subordinated to the needs of business. The Accord was also driving down the wages share of GDP from 61.9 to 55.1 per cent, while the profit share went from 18.9 per cent in 1982 to 23.5 per cent in 1989. By the 1990s Australia had one of the worst levels of income inequality in the Western world.

The “recession we had to have”

However, despite Labor providing ideal conditions for exploitation and boosting profits, companies utilised the cheap labour provided by the Accord and were disinclined to invest in the new machinery that could have raised productivity. The economic recovery that occurred after 1984 was sluggish. But the floating of the dollar and the cheap money from the financial deregulation began to fuel inflation. Keating and Treasury officials responded by cutting government spending and ratcheting up interest rates, which hit a high of 18 per cent in 1989. This produced one of the more extreme versions of the monetarist shock therapy being imposed by Thatcher in the UK and Reagan in the US.

Instead of fixing inflation, high interest rates pushed the economy into a downward spiral. Initially, Keating believed Treasury hype that “the markets” were on the verge of recovery, or at the very worst there would be a “soft landing” to the recession. Finally, on November 29, 1989, with GDP sharply contracting and unemployment at 7.2 per cent, Keating was forced to acknowledge that the economy was in serious recession. But now Keating declared this was “the recession we had to have”.

The impact was drastic. Between July 1990 and February 1993, 3.9 per cent of Australian workers were sacked. Australia’s unemployment rate reached 10 per cent in September 1991. It peaked at a post-war high of 11.2 per cent in December 1992 and was still above 10 per cent in July 1994. Many of the 920,000 people thrown onto the scrap-heap in the “recession we had to have” would never work again. It took 18 years before unemployment would drop back to pre-1990 levels.

But at the time and since Keating has argued that this catastrophe was a good thing because it stopped Australia going “back to the dismal business of wage breakouts…the seven years of Accord and wage restraint would have been thrown out the door in the event that there wasn’t a substantial slowdown…The fact is we had to have it.”

Enterprise bargaining and attacking the unions

Through the 1980s, Labor’s Accord with the ACTU had shackled a working class that had led the world in industrial militancy in the 1970s. Under the Accord, the unions became a wing of Labor government policy and produced a rapid erosion of delegates’ networks and workplace organisation. With the unions drastically weakened, in 1991 Keating ended centralised wage fixation, replacing it with Enterprise Bargaining. Deregulation of the labour market was essential for Keating’s goal to create a more competitive, flexible and efficient Australian capitalism.

Enterprise bargaining had long been Liberal Party policy and bitterly opposed by the union movement. Instead of wages being based on the cost of living and needs of workers, under enterprise bargaining wages were tied to the profitability of individual enterprises. Now workers would only get pay rises if conditions were traded off or they promised to work more intensively to increase their productivity and profits. Overtime and penalty rates quickly disappeared from agreements, leading rapidly to the extension of “normal hours” and an increase to average hours of the working week.

Enterprise Bargaining also undermined industrial solidarity. No longer would awards or industry-wide struggles determine workers’ conditions. Instead bosses were free to offer separate conditions to separate factories and even to create divisions by offering different conditions to different sections of their employees.

“One for the true believers”: the 1993 election

A decade of incessant neo-liberal attacks on workers and the poor had seen Labor’s support steadily plummet. In early 1991, 38.5 per cent of people blamed Treasurer Keating for the “economic downturn”. This was what Keating faced when he finally ousted Hawke as Labor leader to become Prime Minister in December 1991.

Keating was widely hated and the 1993 federal election was widely considered unwinnable for Labor.

But Keating was able to pull Labor back from electoral oblivion just long enough to win in 1993. The thing that saved Keating was Fightback!, the election package developed by Liberal leader (and academic economist) John Hewson. Fightback! was a blueprint for even more severe neo-liberalisation that included cutting people off the dole after nine months, limiting public access to hospitals and cutting Medicare. At its centre was the introduction of a 15 per cent Goods and Services Tax (GST), a regressive tax on everything, directed at the working class.

Keating himself had publicly supported a GST in the early 1980s. Labor had overseen the sharpest decline in welfare and working class living standards since WWII, and Keating planned further rounds of privatisation and market reforms.

But the horror of a possible Hewson victory allowed Keating to mobilise the anti-Liberal anger into a Labor vote. Keating’s biting anti-Liberal rhetoric won him some popularity. He mocked the snobbery of the Liberals and wittily caricatured Hewson as a “feral abacus”, sneered that debating him was “like being flogged with a warm lettuce” and dismissed Fighback saying “this is the sort of little boy, stamp your foot stuff which comes from a financial yuppie when you shoe him into parliament.”

Another factor against Hewson at the Federal level was the election of Jeff Kennett in October 1992. Kennett introduced savage cuts but they were met with a massive fight. For the federal election in March 1993, anti-Hewson rallies in every state helped consolidate the vote to keep the Liberals out.

Selling the family silver: privatisation

But the “true-believers” who, despite the betrayals of the 1980s, voted Labor in 1993, were in for another shock. With the election victory under his belt, Keating quickly turned his reform energies to dismantling the public sector. Initially Keating savagely cut federal funding for social services. He had a record of imposing cuts after his years as Treasurer, and later bragged, “the expenditure review committee had been meeting for seven and eight hours a day for three and four months a year for half a dozen years. We had all that grinding work to get outlays down and re-order Commonwealth spending.”

Another insidious development was “targeting” welfare policies. Initially this “means testing” was justified on the basis of saving money by excluding people on higher incomes from accessing various payments and services. But the targeting became tighter and tighter. Labor also introduced “reciprocal obligation” (later “mutual obligation” under Howard) demanding welfare recipients meet certain obligations such as the unemployed being required to meet job search quotas, attend compulsory make-ready interviews, undertake training or work experience.

The impact was to create a stigma around social security payments. Instead of welfare being understood as a social benefit for needy sections of the community, it became associated with a disadvantaged underclass such as the unemployed, single mothers, Aboriginal people and the disabled.

Having made cuts, Keating then pushed the “corporatisation” of the public sector—imposing user-pays for services and driving them to perform as profit-making businesses.

In 1992 Keating tasked Fred Hilmer (previously a senior manager of Fairfax, TNT, Pacific Power, Foster’s Group, Coca-Cola and Macquarie Bank and now the much-hated anti-union Vice Chancellor of UNSW) with creating a committee of enquiry to develop a National Competition Policy. This would be the tool both Keating and then Howard would use to force government departments and social services to compete with each other and with the private sector for funding. Competitive tendering allowed the government to cut back funds to services that it didn’t value and leave the workers at the coalface to work harder to fill the gaps.

Under this process, Australia Post was corporatised. Optus was created as a Telecom competitor and later Telecom became Telstra (and was promptly privatised by Howard). But corporatisation was always a step towards full privatisation, and despite Labor’s historic opposition, Keating spent his final years in office selling off public assets including the Aerospace Technologies of Australia, Australian Industry Development Corporation, AUSSAT,  Australian Airlines, Commonwealth Serum Laboratories, the Commonwealth Bank, Moomba-Sydney Pipeline, Qantas and the Snowy Mountains Engineering Corporation.

This radical transformation of the Labor tradition of defending government services and the welfare state would later be adopted and theorised as the “third way” by the right-wing British New Labour project under Tony Blair. This marriage of neo-liberalism with a veneer of social democracy, “capitalism with a human face”, grew from Labor’s ruthless commitment to running the system.

Labor’s neo-liberalism

In a very real way, the road to Howard’s election was paved by Keating’s government. When Labor lost the 1996 election to John Howard, its primary vote was 38.75 per cent—the lowest (at that time) since the defeat of the hated Scullin government in 1931. Such was the disgust with Labor that 600,000 people who had voted Labor all their lives voted Howard, as did 47.5 per cent of manual labourers.

The inequality and declining services of 13 years of neo-liberal Labor allowed the Liberals—the historical party of business—to present themselves as the party of the “battlers”. Politically and economically Labor had gutted its own electoral base, the organised working class. The steepest decline in union density occurred during the 1990s when a decade of the Accord combined with Enterprise Bargaining to tie unions’ hands behind their backs. This alone removed a section of Labor’s historic voting base that it has never recovered.

The 44.9 per cent primary vote Keating won in the 1993 election now seems like a high-point compared to Labor’s declining popularity under Rudd and Gillard.

Yet despite Keating’s history as the leader most responsible for decimating the party, and entrenching neo-liberal economics, the Hawke-Keating years are celebrated as the glory days of modern Labor and Australian capitalism.

Even in his essay in The Monthly, written to supposedly denounce neo-liberalism after the Global Financial Crisis, Rudd declares, “Hawke and Keating pursued an ambitious and unapologetic program of economic modernisation. Their reforms internationalised the Australian economy, removed protectionist barriers and opened it up to greater competition.”

Julia Gillard boasts that, “These policies [of Hawke and Keating] required enormous political courage and the understanding of a visionary trade union movement. But, as an essential part of the overall economic reform program, they helped lay the platform for almost 20 years of sustained economic growth and job creation.”

Kevin Rudd and Julia Gillard sing the praises of Hawke and Keating because, like them, they too are committed to “responsible economic policies” and managing Australian capitalism. Even as neo-liberalism precipitated the most serious crisis since the 1930s, Labor has looked to more market solutions.  And just as Hawke and Keating were quite willing to restrict union rights and undermine the conditions of workers to maintain the profits of big business, so Gillard and Swan are prepared to make concessions to the big mining companies, reduce corporate tax, and restrict unions rights and push through spending cuts to maintain a budget surplus.

There was always an irreconcilable contradiction at the heart of Laborism. Labor in office is wedded to managing capitalism, although it still relies on the unions and the working class for electoral support.

The Hawke and Keating years resolved that contradiction firmly in favour of the big end of town. Rudd and now Gillard continue to rule in the tradition of Hawke and Keating. They may pay lip-service to the class they are meant to represent—how many times have we heard about “working families”—but in practice their policies favour the rich and powerful. Just as Keating paved the way for Howard, Gillard is paving the way for Abbott.

That’s why the unions will have to fight independently of Labor, and fight the Labor government itself. And it’s why we need to build a socialist alternative to Labor, committed to building the struggles that have the power to challenge the system.

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